CHAPTER-VI

SUMMARY AND CONCLUSION

The chapter presents a summary of the thesis with findings, conclusion

and suggestions. Thoughts for further research with other techniques are also
mentioned. The detailed results of the study have been given in chapter fourth
and fifth. However, for the purpose of the better understanding of the findings in
order to arrive at a conclusion regarding the study, it is necessary to present the
main findings for the study. Various studies have been carried out at national as
well as international level which analyze the risk and return relationship and the
effect of diversification. There is a large body of literature on the risk and return
analysis. The present research has been attempted to analyze the risk-return
relationship and the effect of diversification in India with the help of selected 225
securities of BSE-500. The analyses of risk and return, their relationship and the
effect of diversification have remained a doubtful issue with the researcher,
academicians and financial analysts worldwide. With the transition economy,
multifarious opportunities are available for investors for investing. The craze of
investing is mushrooming. The issue concerned with investment from investors
is, how securities are priced and this issue is also linked with the two important
aspects of investment decisions. Thus, risk and return both are the key basics of
investment decision making. The present study also focused on the relationship
between stock prices and macroeconomic variables in India with the help of
different econometric techniques such as Unit Root Tests (Augmented
Dickey- Fuller test and Philips-Perron test) to check the stationary of the different
variable series and the long-run relationship between different macroeconomic
variables and stock market return in India has been tested by Johansen’s
Cointegration Test and the short term effects has been checked with the help of
Vector Error Correction Model (VECM).This chapter contains four parts:

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Part 1 of the chapter sixth presents a significance of the study and research
methodology followed in the study.

Part 2 of the chapter sixth presents the results of the study which has been divided
into part 2 (a), part 2 (b) and the part 2 (c).

Part 2 (a): presents the results of risk and return analysis

Part 2 (b): presents the results of diversification effects.

Part 2 (c): presents the results of relationship between macroeconomic

variables and stock market returns in India.

Part 3 of the chapter sixth presents some suggestions.

Part 4 of the chapter sixth presents scope for further research.

Part – 1

The main objective of the study was to analyze the risk of return of the
selected securities during the study period of 1 January 2001 to 31 December
2011. Specifically, the objectives of the study were:

1. To study the relationship between systematic risk (beta) and return

of individual securities/portfolios
i. To examine the risk and return of individual selected
securities.
ii. To examine the risk and return of portfolios.
iii. To examine the industry-wise risk and return.
2. To examine the relationship between portfolio size and portfolio
risk.
3. To examine the effect of diversification on non-market risk.
4. To study that how many securities make a well diversified
portfolio.
5. To examine whether macroeconomic variables (industrial
production, consumer price index, exchange rate, money supply
and call money rates) have any significant relationship with stock
market returns in India.
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 On the basis of the above mentioned objectives, the following hypotheses
have been framed:

1) In order to examine the relationship between risk and return, the

following null hypothesis has been tested:

H10 : There is no significant relationship between beta and return

(individual securities/portfolios) .

H11 : There is a significant relationship between beta and return

(individual securities/portfolios).

2) To examine the relationship between portfolio size and portfolio

risk, the following hypothesis has been tested against the
alternative hypothesis:
H20: Portfolio size is positively related to portfolio risk.
H21: Portfolio size is negatively related to portfolio risk.
3) To examine the effect of diversification on non-market risk, the
following hypothesis has been tested against the alternative
hypothesis:
H30: Diversification has no effect on non-market risk.
H31: Diversification has effect on non-market risk.
4) In order to examine the relationship between macro economic
variables (industrial production, consumer price index, exchange
rate, money supply and call money rates) and stock market return,
the following hypotheses has been tested against the alternative
hypotheses:
H401: There is no significant relationship between industrial
production and stock market returns in India.
H411: There is a significant relationship between industrial
production and stock market returns in India.
H402: There is no significant relationship between consumer
price index and stock market returns in India.
H412: There is a significant relationship between consumer price
index and stock market returns in India.

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 H403: There is no significant relationship between exchange rate
and stock market returns in India.
H413: There is a significant relationship between exchange rate
and stock market returns in India.
H404: There is no significant relationship between money supply
and stock market returns in India.
H414: There is a significant relationship between money supply and
stock market returns in India.
H405: There is no significant relationship between call money
rate and stock market returns in India.
H415: There is a significant relationship between call money rate
and stock market returns in India.

In accordance with these objectives, the study used the following methodology:

Keeping in view of present study, the main data used in the study was
secondary in nature. The present study is for eleven years starting from 1 January,
2001 to 31 December 2011. As discussed in chapter 1, this period has been
chosen because of huge transition in economy. During this period many
developments took place in the Indian Capital Market. So, a need has been felt to
analyze the risk and return of Indian equities. In the study also the eleven years
data has been used to examine the effect of macroeconomic variables on stock
market returns in India. The sample size includes a total number of 225 securities
and sample population consists of all the securities listed on BSE-500. The study
used daily adjusted closing prices and monthly adjusted closing prices of listed
225 securities of BSE-500. The selection of stock varies on the basis of the listing
in BSE-500, market capitalization, trading volume and the availability of data.
This provides us with a sample size of 225 securities. In the study,
macroeconomic variables effect has also been checked. In order to check the
effect of macroeconomic variables on stock market returns, the following
variables have been used (Industrial Production, Consumer Price Index,
Exchange Rate, Money Supply, Call Money Rates).

For the purpose of checking the effect of macroeconomic variables on

stock market returns, the monthly data has been used because there were some
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difficulties for undertaking the daily data and most of the studies used monthly
data for the purpose of checking the effects of macroeconomic variables on stock
market returns. The statistical tools applied for the purpose of the analysis
included first-pass regression model and the second pass regression model,
arithmetic mean, variance, beta, Augmented Dickey-Fuller test, Phillips-Perron
(PP) test, Johansen’s cointegration test, Vector Error Correction Model etc. The
most sophisticated statistical software’s Microsoft Excel, SPSS, E-VIEWS,
STATA has been used to process the data, to make the analysis and to find out
the results. The main objective of the study was to analyze the risk and return of
selected securities in Indian stock market. Therefore, the scope of this study was
limited to India only.

Part – 2

The major findings of the present study have been divided into three
parts:

Part 2 (a): presents the results of risk and return analysis

Part 2 (b): presents the results of diversification effects.

Part 2 (c): presents the results of relationship between macroeconomic

variables and stock market returns in India.

Part 2 (a): Results of Risk and Return Analysis

The results in the context of risk and return of selected securities are as
follows:

 A beta is greater than one shows the security is more volatile than the
market. In case of daily data, the following securities have beta value
greater than one. These includes: Alok Industries Ltd., Bank of India,
Bharat Heavy Electricals Ltd., Bombay Dyeing & Manufacturing Co.
Ltd., Century Textiles & Industries Ltd., Dena Bank, Escorts Ltd.,
Hindalco Industries Ltd., ICICI bank Ltd., IDBI Bank Ltd., India Cements
Ltd., Jindal Steel & Power Ltd., Mangalore Refinery Petrochemicals Ltd.,
Neyveli Llignite Corpn Ltd., Rashtriya Chemical & Fertilizers Ltd.,

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 Reliance Infrastructure Ltd., Sesa Goa Ltd., State Bank of India, Steel
Authority of India Ltd., Tata Motor Ltd., Tata Power Company Ltd., Tata
Steel Ltd., Wipro Ltd. That showed 10.22 percent of securities have beta
value greater than one. Therefore, these securities have beta value greater
than one as compared to other securities which are high risky and provide
higher return.

 In case of daily data, the beta of the sample securities ranges from 0.01
lowest to 1.38 highest value. Thus, Glenmark Pharmaceuticals Ltd. (0.01),
South Indian Bank Ltd. (0.02), BEML Ltd. (0.03), Clariant Chemicals
(India) Ltd. (0.03), Colgate-Palmolive (India) Ltd. (0.03), Crompton
Greaves Ltd. (0.03), Lupin Ltd. (0.03), Rain Commodities Ltd. (0.03),
Great Eastern Shipping Company Ltd. (0.04) has the lowest beta value
indicating the less risky securities while Century Textiles & Industries
Ltd. (1.38), Jindal Steel & Power Ltd. (1.37), Steel Authority Of India
Ltd. (1.34), Reliance Infrastructure Ltd. (1.31), Tata Steel Ltd. (1.29),
Bombay Dyeing & Manufacturing Co Ltd. (1.23), Tata Motors Ltd.
(1.20), Neyveli Lignite Corpn. Ltd. (1.20), Indian Cements Ltd. (1.18) has
the highest beta value indicating the high risky securities. The highest
beta value of 1.38 means that the security is 1.38 times as volatile as the
market. It is very interesting to state that only six securities (2.67 percent)
viz, Glenmark Pharmaceuticals Ltd., South Indian Bank Ltd., Rain
Commodities Ltd., Thomas Cook (India) Ltd., FDC Ltd., Sun
Pharmaceuticals Inds. Ltd., lies in the category of lower return taking
higher risk.

 In the context of expected return, it is found that 222 (98.67 percent)

securities out of 225 securities had yielded positive expected returns. The
overall maximum expected return was from Century Textiles &
Industries. Ltd. which was followed by Steel Authority of India Ltd.,
Jindal Steel & Power Ltd., Tata Steel Ltd., Reliance Infrastructure Ltd.,
Bombay Dyeing & Manufacturing Co Ltd., Neyveli Lignite Corpn. Ltd.,
Tata Motors Ltd., Alok Industries Ltd., Indian Cements Ltd etc. The
overall minimum expected return was from Sun Pharmaceutical Inds.

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 Ltd., Rain Commodities Ltd., FDC Ltd. To have a meaningful conclusion,
we need to see the overall on an average the value of beta and the value of
expected returns. It also found that on an average all securities showed
positive beta value and positive expected return value.

 In case of monthly data, the following securities have beta value greater
than one. These are: Abbott India Ltd., Aditya Birla Nuvo Ltd., Amara
Raja Batteries Ltd., Bhushan Steel Ltd., Century Textiles & Industries.
Ltd., Chambal Fertilisers & Chemicals Ltd., Deepak Fertilisers &
Petrochemicals Corpn. Ltd., Eicher Motors Ltd., EIH Ltd., Federal Bank
Ltd., Gujarat State Fertilizers & Chemicals Ltd., Himadri Chemicals &
Industries. Ltd., IFCI Ltd., Indian Overseas Bank., Indusind Bank Ltd.,
Lupin Ltd., Madras Cements Ltd., Mangalore Refinery & Petrochemicals
Ltd., Mphasis Ltd., Nestle India Ltd., NMDC Ltd., Rallis India Ltd.,
Ranbaxy Laboratories Ltd., Rashtriya Chemicals & Fertilizers Ltd.,
Raymond Ltd., Rolta India Ltd., Sesa Goa Ltd., Shree Cement Ltd.,
Siemens Ltd., Sintex Industries Ltd., South Indian Bank Ltd., Spicejet
Ltd., SREI Infrastructure Finance Ltd., SRF Ltd., State Bank Of Bikaner
& Jaipur, State Bank Of India, State Bank Of Mysore, State Bank of
Travancore, Steel Authority Of India Ltd., Sterlite Industries (India) Ltd.,
Sundram Fasteners Ltd., Supreme Industries Ltd., Tata Elxsi Ltd., Tata
Investment Corpn. Ltd., Tata Motors Ltd., Tata Power Company Ltd.,
Tata Steel Ltd., Tata Teleservices (Maharashtra) Ltd., Thermax Ltd.,
Titan Industries Ltd., TTK Prestige Ltd., Tube Investments of India Ltd.,
Uflex Ltd., Unitech Ltd., United Breweries (Holdings) Ltd., Usha Martin
Ltd., Vakrangee Softwares Ltd. That showed 25.33 percent of securities
have beta value greater than one. In case of monthly data, the beta of the
sample securities ranges from 0.001 lowest to 2.34 highest value. Thus,
Polyplex Corporation Ltd., Kajaria Ceramics Ltd., Bharat Heavy
Electricals Ltd., Abbott India Ltd., Bayer Crop science Ltd., has the
lowest beta value indicating the less risky securities while Eicher Motors
Ltd., Sintex Industries Ltd., Spicejet Ltd., IFCI Ltd., Madras Cements
Ltd., United Breweries (Holdings) Ltd., Vakrangee Softwares Ltd. has the
highest beta value indicating the high risky securities. The highest beta
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 value of 2.34 means that the security is 2.34 times as volatile as the
market. In the context of expected return, it is found that 119 (97.33
percent) securities out of 225 securities had yielded positive expected
returns. The overall maximum expected return was from Vakrangee
Softwares Ltd., United Breweries (Holdings) Ltd., Madras Cements Ltd.,
IFCI Ltd., Spicejet Ltd., Sintex Industries Ltd., Usha Martin Ltd., Unitech
Ltd. Rolta India Ltd., Sterlite Industries (India) Ltd.

 In order to find out whether there is any significant relationship between

return and systematic risk of selected securities, the first-pass regression
model has been used. The significance of beta has been checked through
the p-values. If p-value is less 0.05 and 0.01 in that case the null
hypothesis would be rejected and alternative would be accepted.
Therefore, in the present study, in case of daily data, it is founded from
that out of 225 securities, 146 coefficients are positive and significant at 1
percent level of significance and another 26 are positive and significant at
5 percent level of significance. It also found that 53 beta coefficients are
positive but showing insignificant results. Out of two hundred twenty five
securities, one hundred seventy two securities beta is statistically
significant which means the null hypothesis of the relationship between
beta and return (Hypothesis 1) in case of individual securities is rejected
and the alternative (Hypothesis 1) is accepted. By using the daily data, it
found significant relationship exists between beta and return in the case of
individual securities.

 The significance of beta has also been checked by using the monthly data.
In order to find out whether there is any significant relationship between
return and systematic risk of selected securities, the first-pass regression
model has been used. The significance of beta has been checked through
the p-values. If p-value is less 0.05 and 0.01 in that case the null
hypothesis would be rejected and alternative would be accepted.
Therefore, in the present study, in case of monthly data, it is founded that
out of 225 securities, 96 coefficients are positive and significant at 1
percent level of significance and another 17 are positive and significant at

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 5 percent level of significance. It also found that 112 beta coefficients are
positive but showing insignificant results. Out of two hundred twenty five
securities, one hundred thirteen securities beta is statistically significant
which means the null hypothesis of the relationship beta and return
(Hypothesis 1) in case of individual securities is rejected and the
alternative (Hypothesis 1) is accepted. That showed there is a significant
relationship between beta and return in the case of individual securities.
To sum up the results of first-pass regression model, it may conclude that
76.44 percent (daily data) and 50.22 percent (monthly data) indicate the
positive risk-return relationship. The overall results of the first-pass
regression model showed that the daily data provides the higher indication
of the positive risk-return relationship as compared to the results of
first-pass regression model on the basis of the monthly data.

 In the study, the relationship between portfolio beta and portfolio return
has also been checked. In order to find out whether there is any significant
relationship between portfolio beta and return is tested with the help of
second-pass regression model. The significance of beta by using daily as
well as monthly data has been checked through the p-values. In case of
daily data, it is observed that there exists a positive relationship between
the portfolio risk and portfolio return. In that case the slope coefficient
was positive and significant at five percent level of significance that holds
positive risk-return relationship. On the basis of the p-value, we found
that slope coefficient is significant. In that case the value of p is less than
0.05, so we reject the null hypothesis and accept the alternative
hypothesis. That showed there exists positive relationship between the
portfolio risk and return But we can’t ignore the value of the R-square.
Here the value of the R-square is 0.09 that showed a poor explanatory
power of beta for the excess returns. Therefore, the results of the
cross-sectional regression equation (portfolios) also concluded
positive but weak relationship exists between portfolio return and
portfolio risk. In case of monthly data, the study found that the slope co-
efficient is also positive and significant at five percent level of
significance that holds positive risk-return relationship. In case of month-
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 ly data, we found that the value of R-square is higher as comparison to
daily data R-square value. The monthly R-square value is 0.47 that
showed 47 percent explanatory power of beta for the excess returns. The
overall results of the cross-sectional regression equation found that the
monthly data provides good results in the context of portfolio risk and
portfolio return relationship. To sum up the cross-sectional results of
portfolio risk and return, it may conclude that positive but weak
relationship exist between portfolio risk and return over the period
(1 January 2001 to 31 December 2013). The results of the study was
consistent with the study of Black et al. (1972), Fama and Macbeth
(1973), Harrison and Zhang (1999), Mittal and Mittal (2006), Leon et al.
(2007), Vij and Tamimi (2010), Khan (2012). On the other hand the
results of the present study was not consistent with the study of
Madhusoodanan (1997), Manjunatha et al. (2006), Michailidis et al.
(2006), Michailidis et al. (2007), Choudhary (2010), Manjunatha (2011).
The reason behind the contradictory results may be the time period of the
study selected. After finding these results, we found positive but weak
relationship exists between portfolio risk and return. The results can also
be improved with the help of latest econometric techniques.

 We also computed the industry‘s risk and return during the study period.
In the study all the 225 securities have been grouped industry-wise. The
study concentrates on twenty industries. These includes: Health Care (22
securities), Agriculture (12 securities), Miscellaneous (8 securities),
FMCG (16 securities), Media & Publishing (1 security), Consumer
Durables (7 securities), Chemical & Petrochemical (10 securities), Capital
Goods (22 securities), Tourism (4 securities), House Related (15
securities), Finance (28 securities), Transport Equipments (20 securities),
Information Technology (11 securities), Oil & Gas (10 securities), Metal,
Metal Products & Mining (14 securities), Textile (6 securities), Telecom
(4 securities), Diversified (8 securities), Power (3 securities) and
Transport Services (4 securities). Industry beta is simply the weighted
average of the beta of different securities in that industry. In case of daily
data, when the Industry-wise risk and return analysis have done, it found
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 that the highest beta is found in Power (1.07), Diversified (0.80), Telecom
(0.79), Textile (0.72), Metal, Metal Products & Mining (0.66) whereas
health care (-0.06), Agriculture (0.00), Miscellaneous (0.29), FMCG
(0.30) and Media &Publishing (0.31) have the least beta. It also reports
that the highest expected return is found in Power (2.13), Diversified
(1.60), Telecom (1.50), Textile (1.49), Metal, Metal Products & Mining
(1.35) whereas health care (-0.05), Agriculture (0.25), Miscellaneous
(0.41), FMCG (0.55) and Media & Publishing (0.61) have the least
expected return. The examination of the results of these sectors (Power,
Diversified, Telecom, Textile, Metal, Metal Products & Mining sectors)
reveals that higher risk is compensated with higher expected return and
Power, Diversified, Telecom, Textile, Metal, Metal Products & Mining
sectors has attracted investors for investment. Moreover, the value of beta
showed that Power, Diversified, Telecom, Textile, Metal, Metal Products
& Mining sectors are most aggressive (most risky) of the Indian economy
whereas health, agriculture, miscellaneous, FMCG, Media & Media
Publishing sectors are defensive (least risky) of the Indian economy
during the study period. The beta value of 1.07 suggests that for every one
per cent increase in overall market returns, the returns for the Power
sector will increase by 1.07 per cent. In sum up, it may conclude that
sector betas with a value exceeding one are usually associated with
growth and higher risk sectors and are attractive to risk-seeking investors
searching for higher returns. Therefore the Health care sector is less
sensitive to broader market movements compared to the Power Sector.

 In case of monthly data, the highest beta is found in Power (0.86), Metal,
Metal Products & Mining (0.73), Finance (0.72), Information Technology
(0.70), Consumer Durables (0.67) whereas Media & Publishing (0.22),
FMCG (0.30), Health Care (0.37), Diversified (0.39), Miscellaneous
(0.46) have the least beta values. It also reports that the highest expected
return is found in Power Metal (40.74), Metal Products & Mining (35.40),
Finance (35.17), Information Technology (32.81), Consumer Durables
(31.87) whereas Media & Publishing (0.54), FMCG (0.55), Health Care
(17.59), Diversified (18.57), Miscellaneous (19.96) have the least
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 expected return. Moreover, the value of beta showed that the Power,
Metal Products & Mining, Finance, Information Technology, Consumer
Durables are the most aggressive (most risky) of the Indian economy
whereas Media & Publishing, FMCG, Health Care, Diversified,
Miscellaneous sectors are defensive (least risky) of the Indian economy
during the study period. In case of monthly data results, it may conclude
that the Media & Publishing sector is less sensitive to broader market
movements as compared to the Power sector. It also found that there is a
difference between the beta values across the stock from the same
industry and also found that there is also a difference between the daily
and monthly data results.

Part 2 (b): Results of Diversification Effects

 Using data for 225 securities over the period of 1 January 2001 to
31 December 2011, the study showed that as more and more securities
increase in the portfolio, the securities risk declines. In the current study
to examine the relationship between portfolio size and risk, securities are
randomly selected assuming equally weighted portfolios. The results of
the diversification effect have been measured by using the Markowitz
model. It is interesting to note that for a single portfolio the portfolio risk
was observed to be 12.13 percent and for a two security portfolio, the
portfolio risk was observed to be 10.10 percent. The present study also
tested the hypothesized relationship between portfolio size and portfolio
risk and it is noticed that our results are significant that means we reject
the null hypothesis (Hypothesis 2) and alternative hypothesis (Hypothesis
2) is accepted. The results showed that there is a negative relationship
between portfolio size and portfolio risk. It revealed that the value of beta
is (-0.03) indicated inverse relationship exists between portfolio size and
portfolio risk and the coefficients are also significant at 1 percent level of
significance. The results of the present study supported the theoretical
concept of diversification. The results of the relationship between
portfolio size and portfolio risk also supported the study of Al Suqaier and
Al Ziyud (2011).

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 It also showed that as the number of securities in portfolio increases, the
portfolios risk as measured by the standard deviation decreases, which
indicates the existence of a negative relationship between portfolio size
and portfolio risk. The study also concluded that a well diversified
portfolio should include 10 to 15 (daily data) securities. The results are
also supported the results of Evan and Archer (1968) and Irala and Patil
(2007) but in contrast to the study of Gupta and Khoon (2001). The pre-
sent study concluded that portfolio diversification is applicable in the In-
dian stock exchange. It revealed that as the number of securities in
portfolio increases, the portfolios risk as measured by the standard
deviation decreases, which indicates the existence of a negative
relationship between portfolio size and portfolio risk. The overall risk
reduces from 12.13 percent to 4.12 percent. It shows the reduction of
66.03 percent.

 Using the monthly data for 225 securities over the period of 1 January
2001 to 31 December 2011, the study also showed that as more and more
securities increase in the portfolio, the securities risk declines. It is
interesting to note that for a single portfolio the portfolio risk was
observed to be 49.79 percent and for a two security portfolio, the portfolio
risk was observed to be 46.52 percent. The monthly data results of the
diversification effect concluded that a well diversified portfolio should
include 15 to 25 securities. The overall risk reduces from 49.79 percent to
18.89 percent in case of monthly data. The overall results of the study
showed that the monthly data provides that a well diversified portfolio
must be include fifteen to twenty-five securities but the daily data showed
that that a well-diversified portfolio must be included ten to fifteen
securities. To better understanding of monthly and daily data results, the
study concluded that monthly data provides the better results. The
investors should take decisions on the basis of the monthly data.

 In the context of diversification effect on non-market risk, Portfolio one

which includes fifteen least beta value securities that can be categorized
the most defensive portfolio and also showed the slightest reaction to the

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 market and the portfolio fifteen which includes the high beta value
securities that can be categorized the most aggressive portfolio and also
show the greater reaction to the market. The value of 1-R2 is decreasing in
daily as well as monthly data. It showed that the non-market risk decline
with diversification. Therefore, the results of the diversification effect on
non-market risk in India showed valid results. So, the null hypothesis of
diversification effect on non-market risk (Hypothesis 3) is rejected and
the alternative hypothesis of diversification effect on non-market risk
(Hypothesis 3) is accepted. That showed there is a significant effect of
diversification on non-market risk. The results are also consistent with
theory and the study of Dhankar and Kumar (2006). On the other hand,
the study of Bello and Adedokun (2011) examined the risk-return
characteristics of Nigerian quoted firms and revealed that little scope for
diversification in this market.

Part 2 (c): Results of Relationship between Macroeconomic Variables and

Stock Market Returns in India.

 The results of the relationship between macroeconomic variables and

stock market returns in India have been presented in Chapter V. In the
context of testing the relationship between macroeconomic variables and
stock market returns in India, firstly the descriptive statistics as per
logarithm value and descriptive statistics as per the growth rate of all the
selected variables has been prepared. In the context of descriptive
statistics as per the logarithm value found the mean value of BSE prices is
9.060331 with maximum value of 9.928623 and minimum value of
7.941509. While the mean value of industrial production remained during
the study period 5.273799 with maximum value of 5.671259 and
minimum value of 4.943070. As far as the log of consumer price index in
concerned, its average value was 5.693798 with maximum 6.385194 and
minimum value 4.787492 respectively. In addition, it can be seen from
the table that the mean value of exchange rate is 3.821372 with maximum
value of 3.975092 and minimum value of 3.671733 and the mean value of
call money rates was 1.727874 with maximum value of 2.644045 and

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 minimum value of -0.314711 respectively. All the variables exhibit a
positive mean return. Moreover, Bombay Stock Exchange returns,
Consumer Prices Index (CPI), Exchange Rate and Call Money Rate
exhibit a negative skewness which implies that they have a long left tail.
On the other hand the descriptive statistics as per the growth rates is
concerned it found that the mean value of BSE-Sensex returns is
0.009718 with maximum value of 0.248851 and minimum value of
-0.272999. While the mean value of growth rate of industrial production
remained during the study period 0.000183 with maximum value of
0.125043 and minimum value of -0.638204. As far as the Consumer price
Index in concerned, its average value was -0.006700 with maximum
0.045074 and minimum value -1.589235 respectively. In addition, it can
be seen from the table that the mean value of the change in Exchange Rate
is 0.001049 with maximum value of 0.069472 and minimum value of
-0.060743 and the mean value of the change in the Call Money Rates was
-0.000690 with maximum value of 2.156846 and minimum value of
-1.198478 respectively.

 After that ADF test is used to check here to see whether all of the
variables have unit root or not. For this purpose, two tests namely
Augmented Dickey Fuller (ADF) test and Phillip Perron (PP) has been
applied. With the help of ADF and PP test, it found that BSE Sensex’s
returns, Industrial Production, Consumer Price Index, Exchange Rate,
Money Supply, Call Money Rates (at first difference), the ADF
Calculated Value (-18.44111), (-8.050551), (-8.037024), (-15.99750),
(-8.476046), (-10.55269) is less than the critical values at 1%, 5% and
10% level of significance. It means BSE Sensex’s returns, Industrial
Production, Consumer Price Index, Exchange Rate, Money Supply, Call
Money Rates series has no unit root problem. It means the BSE Sensex’s
returns, Industrial Production, Consumer Price Index, Exchange Rate,
Money Supply, Call Money Rates series is stationary. Though the results
of ADF and PP test it can be concluded that all of the variables are
stationary at first difference.

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 The next step was in this study is to test for cointegration. If all of the
variables are stationary at same order, then cointegration test have been
used. The value of trace (trace statistics) corresponding to r = 0 is
100.0256 which is higher than the corresponding critical value of 94.15 at
5% level of significance. The value of trace (trace statistics)
corresponding to r = 1 is 69.86768 which is also higher than the
corresponding critical value of 68.52 at 5% level of significance. The
value of trace (trace statistics) corresponding to r = 2 is 52.79181which is
higher than the corresponding critical value of 47.21 at 5% level of
significance. The value of trace (trace statistics) corresponding to r = 3 is
30.29271 which is higher than the corresponding critical value of 29.68 at
5% level of significance. The value of trace (trace statistics)
corresponding to r = 4 is 16.813171 which is higher than the
corresponding critical value of 15.41 at 5% level of significance. The
value of trace (trace statistics) corresponding to r = 5 is 4.394755 which
is higher than the corresponding critical value of 3.76 at 5% level of
significance. Hence the conclusion is that the null hypothesis of no
cointegration is rejected in favour of the alternative of cointegration
including all the variables. That showed long run relationship exists
between macroeconomic variables and stock market returns in India. The
same conclusion was also obtained on the basis of max statistics
because in this case computed values for r = 0, r= 1, r = 2, r = 3, r = 4, r =
5 i.e., 62.314, 61.231, 35.246, 28.549, 17.8135, 11.35711 also higher than
the corresponding critical values of 40.30, 34.40, 28.14, 22.00, 15.67,

9.24. Though trace and max results, it is clearly found that long run

relationship exist between stock market returns and macroeconomic

variables.

 To sum up (the relationship between macroeconomic variables and stock

market returns in India), found that there is a long run relationship exists
between all of the macroeconomic variable and stock market returns in
India over the period and with the help of Vector Error Correction Mode
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(VECM), found that there is no shot term effect between macroeconomic
variables and stock market return in India over the period. Therefore we
concluded that the null hypothesis of the relationship between the
industrial production and stock market returns in India (Hypothesis401) is
rejected and the alternative hypothesis of the relationship between the
industrial production and stock market returns in India (Hypothesis411) is
accepted. That concluded there is a significant relationship between the
industrial production and stock market returns in India. Moreover, it also
concluded that the null hypothesis of the relationship between the
consumer price index and stock market returns in India (Hypothesis402) is
rejected and the alternative hypothesis of the relationship between the
consumer price index and stock market returns in India (Hypothesis412) is
accepted. That concluded there is a significant relationship between the
consumer price index and stock market returns in India. In addition, it
also concluded that the null hypothesis of the relationship between the
exchange rates and stock market returns in India (Hypothesis403) is
rejected and the alternative hypothesis of the relationship between the
exchange rates and stock market returns in India (Hypothesis413) is
accepted. That concluded there is a significant relationship between the
exchange rates and stock market returns in India. Moreover, it also
concluded that the null hypothesis of the relationship between the money
supply and stock market returns in India (Hypothesis404) is rejected and
the alternative hypothesis of the relationship between the money supply
and stock market returns in India (Hypothesis414) is accepted. That
concluded there is a significant relationship between the money supply
and stock market returns in India. In addition, it also concluded that the
null hypothesis of the relationship between the call money rates and stock
market returns in India (Hypothesis405) is rejected and the alternative
hypothesis of the relationship between the call money rates and stock
market returns in India (Hypothesis415) is accepted. That concluded there
is a significant relationship between the call money rates and stock market
returns in India. The overall conclusion of the relationship between
macroeconomic variables and stock market returns in India found that

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 over the period, the study showed, there is a long run relationship exists
between macroeconomic variables and stock market returns in India.

 The short term effect has been checked with the help of the Vector Error
Correction Model (VECM). The overall results of the Vector Error
Correction Model exhibits no short terms effects among all of these
variables. The following equation present statistical results on Vector
Error Correction Model with the lag specifications:

D(log BSE) = -0.009309 [log (BSE (-1) - 0.539305 log(IP(-1) +

4.149429 log (CPI(-1) -3.375868 log (EXR(-1) - 2.123252 log
(MS (-1) - 3.392544 log (CMR (-1) + 0.047573] + (0.79514) +
(3.02045) + (4.86673) + (4.98993) + (2.38678)

 Some of the studies have also confirmed the long run relationship exists
between macroeconomic variables and stock market returns with the help
of Johansen’s cointegration test such as Asaolu and Ogunmuyiwa (2011),
Maysami et al. (2004), Gay and Nova (2008). On the other hand, the
study of Hosseini et al. (2011) found long run as short run linkage
between macroeconomic variables and stock prices in India. The findings
of the study are not consistent with the study of Kutty (2010), Tursoy,
Gunsel and Rjoub (2008), Seshaiah and Tomer (1997) etc.

Conclusion of the study

Different securities of the BSE-500 have been offering different returns at

the given level of risk. The study was about the risk and return analysis. This
study has its own importance because we know that in the era of modernization,
multifarious opportunities are available for investors for investing. The craze of
investing is mushrooming. Investing is not an easy game. In simply due to
uncertainty, investing is a risky concept. To begin with, there is no denying the
fact that risk and return plays a prominent role in decision making. As far as
theoretical concept of risk-return relationship and the diversification effect is
concerned, it is a major ambiguous issue. This issue arouses curiosity in the mind
of investors, researchers, academicians and practitioners. A curious investor and
researcher may find any information about anything that he/she is interested in.
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The study found positive but weak relationship between risk and return. But one
of the important thing is that the study checked the risk-return relationship only
one the basis of the slope test. We can also used different other Capital Asset
Pricing Models. Therefore, this study could be improved with the help of testing
other Capital Asset Pricing Models and the latest econometric techniques. On the
other hand, the study found there is an inverse relationship exists between
portfolio size and portfolio risk. The results of the relationship between portfolio
size and portfolio risk are also consistent with the theory. So, here we can’t deny
the theory significance. The testing of diversification effect on non-market risk in
India during the study period of 1 January 2001 to 31 December 2011 also
provided the consistent result of the past studies. That showed during the study
period, there is a significant effect of diversification on non-market risk in India.

In addition, after reviewed many articles, we found that many of the

researchers explained in their study that if there exist long run relationship among
macroeconomic variables and stock market returns, that are also linked with the
diversification situation. That showed if long run relationship exists among macro
economic variables and stock market returns that showed on that period investors
can take the benefits of diversification in long run. In the study, we found long
run relationship exists among macroeconomic variables and stock market returns
in India during the study period of 1 January 2001 to 31 December 2011. The
study concluded that investors can take the benefits of diversification situation in
long-run. Thus, it concluded that investors should invest for long-run. The study
showed that Indian stock market are having long run relationship with
macroeconomic variables which employed that macroeconomic changes can be
used to predict the stock prices changes in the Indian stock market. The overall
results of the study concluded that all of the variables are playing a vital role in
explaining the stock market performance. The Indian stock market is still
showing some dramatic changes. So the policy makers should keep in mind all of
these points during the implementation of the policies.

The study is immensely valuable for investors in this sense it provides the
details of the relationship between risk and return and also provides the details of
the effect of macroeconomic variables on stock market returns. The use of

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different tools to examine the relationship between macroeconomic variables
provides econometric holds. This study would be useful for portfolio managers,
financial analysts and policy makers because financial analysts provide guidance
to business and individuals making investment decisions. The effect of
macroeconomic variables (industrial production, consumer price index, exchange
rate, money supply, call money rates) on stock market return provides
implications for monetary policy and portfolio management practices.

Part – 3

Suggestions

In the scenario, the investors is searching for an investment instrument

with the help of which, investors can get returns, without taking too much risk. If
the following suggestions are followed by investors, it can take a proper decision
for investment and also they can earn maximum return with a minimum risk
level. The suggestions are:

(1) If investors want to choose a right company to invest their funds,

the investors should analyze the market on a continuous basis.

(2) Diversification is also important athwart market environments-the

longer your investment period, the better it would be.

(3) Not only increase in number of securities in portfolios diversifies

the risk but also investors should select the securities with
awareness. An investor can gain through diversification if two
securities are less than perfectly correlated.

(4) Time horizon takes place at superior for investment decision. The-
ory also suggests that investment decision could be better across
longer time-periods of seven years to ten years.

(5) One more important thing is that some risks such as monsoon,
global recession can’t be eliminated through diversification. So
still the combination of securities in security market can be risky.

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 (6) If you want to be successful investor, you should have patience
because patience is the key of success.

(7) Investors should read all the selected securities information

carefully.

(8) The present study also advice to investors that always diversify
your portfolio and your investment is in equity, always do
investment for long run and also do investment in a systematic
way. One of the most important reason is for that there are always
fluctuations in the market and the losing money possibility
decreases as the time period of investment increases.

Some prominent paths for becoming a successful investor

 Mind set up for long run

Mind set up is a most important path for becoming a successful investor.

Investors should always focus on long term opportunities, not the short
term opportunities.

 Patience

Truly speaking, if you want to be a successful investor, you should have

patience’s because patience is the key of success.

 Smart work not hard work

I personally think successful investor is one who takes decision with the
help of smart work not the hard work because best decisions gives
opportunities to become rich. Investors should seize the opportunity when
it comes.

 Pay close attention on the subject of selecting portfolio

Investor should pay close attention on the subject of selecting portfolio

otherwise there is the possibility of great risk in investing.

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  Immense Knowledge

The issue of risk, return and diversification effect must be addressed to

investors because a person who lacks the awareness, knowledge of equity
market, it will be difficult for him to take a proper decision for investment
and in India several investors suffering vast losses due to the investment
the awareness about the concept of risk-return relationship and the
diversification effect.

To sum up, it may conclude that if an investor invests carefully and

sincerely, investor can make prosperous future. Therefore, investors
should have immense knowledge about the security market and every
concept that is concerned with investment.

Part – 4

Scope for Further Research

Only a few studies are addressed the empirical existence of risk-return

relationship. There is an enough scope for further research on risk-return analysis.
The main empirical research questions that has been already studied by many
researchers (i) Is there any relationship between risk and return. (ii) Is there any
affect of diversification? (iii) Is CAPM valid in Indian context? (iv) Does small
companies provide higher return as compared to large companies? (v) Is there
any effect of macroeconomic variables on stock returns? Many researchers
answered these questions by applying smaller period and involving less stock.
The empirical research questions could be answered by applying much longer
period and involving much stock that means a long term analysis is necessary to
find out any conclusion on risk-return relationship and the relevant issues on
risk-return analysis. After reviewing, the present study found that many questions
left unanswered regarding risk-return analysis in the Indian stock market.

In the study the risk-return relationship was checked on the basis of slope
test. The study considered beta as the influencing factor on the return. Further
research could be made to study the multifactor model on the same description.
Moreover, further research could be made to analyzed the risk and return of

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different securities on the basis of daily, weekly, monthly, quarterly, half yearly
data, yearly data and can check that the mean return and risk of different intervals
are equal or not. It should be checked with the help of individual securities and
with the help of industries data. Moreover, we can also test the applications of
CAPM (Capital Asset Pricing Model) with the help of econometric techniques.
The effect of diversification on r-square values deserves the further analysis.
There is a need to carry out more research regarding this study.

Apart from these, further research should be conducted to study the

impact of macroeconomic variables, financial variables on systematic risk in
India. Tang and Shum (2003) suggested that further research could be applied to
test whether economic variables can work better under the conditional framework
based on up and down markets. On the other hand, the study can be further tested
on the conditional and unconditional relationship between beta and return and
also the further research could be applied to test the other asset pricing models in
the Indian stock market and a comparative study of different asset pricing models
should be used for details analysis in the Indian stock market. Further research
should be made an attempt to examine the relationship between return and
kurtosis, skewness, standard deviation, total risk and covariance.

Further research could be analyzed to study the effect of macroeconomic

variables on the various sectors in the stock market of Indian Economy. The
relationship between macroeconomic variables and stock prices can be tested for
other countries and we can make a comparison of different countries results to
see the difference among different countries results and can make a conclusion on
the behalf of the results. Moreover, the importance of macroeconomic shocks for
sector indices of the Indian stock market also remains future research issue.
Further research could be analyzed to study the investor’s perception of risk and
return in different stocks. These issues remain for our future research.

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